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Bank of Mum and Dad - beware lack of documentation

As house prices continue to rise, more people are relying on the generosity of family to get on the property ladder.

Legal & General published a report in 2019, which estimated the UK’s collective Bank of Mum and Dad (BoMaD) has given out roughly £6.3 billion to fund house purchases. It’s now so common to receive help from family when buying property that, if BoMaD was a real bank, it would be the 11th most popular mortgage lender in the UK.

However, it’s important for BoMaD to protect these significant loans or gifts with a legal agreement. While 59% of family members say they’re happy to gift funds towards a house purchase, the other 41% might expect their loan to be repaid. And while many families are happy to help their relatives, things can get tricky if the money ends up in the hands of a third party. 

As a result, the courts are seeing more cases where parents are claiming against estates. The recent Court of Appeal case of Farrell v Burden is a cautionary tale for BoMaD, as it shows just how complicated things can get.

Mrs Farrell stated that she’d loaned her son, Mr Farrell, a sum of money in 2005 so he could buy a property. Mr Farrell’s wife, Ms Burden, disagreed. While she acknowledged that her mother-in-law had given the pair money, she believed it had been gifted, rather than loaned, to them. However, neither side had any documentation to support their view.

After Mr Farrell’s death in 2016, the two sides continued to disagree about the money. Mr Farrell’s will stated that his estate would pass primarily to his wife. He also asked that part of the estate went to his children from a previous relationship. Mr Farrell hadn’t included anything in his will about repaying the debt to his mother. Believing she was still owed money, she brought a claim against his estate.

At the first hearing in June 2019, the judge found that Mrs Farrell didn’t have any proof that she was owed money by Mr Farrell’s estate. He also ruled that, even if there was a sum outstanding, the payment made by Mrs Farrell had been a gift in the eyes of the law. In addition to her defeat, the judge also ordered Mrs Farrell to cover the costs of the estate (reportedly around £100,000).

Mrs Farrell wasn’t satisfied by the decision of the County Court and appealed it. But, when the Court of Appeal looked at the case again in December 2019, it upheld the original decision. This was due to the lack of any evidence that the money was intended to be a loan, rather than a gift. As Mrs Farrell didn’t ask her son and his wife to sign anything before handing over the money, she had nothing in writing to support her claim. 

This claim was against an estate but, as a family lawyer, I’m seeing more and more of these issues come up in the Family Court between living parties. Often, these disputes happen because BoMaD have loaned or gifted money to a child to buy a property too hastily. Many families don’t have a proper discussion about how they expect the money to be repaid or used. Even fewer document the terms of the loan to give BoMaD legal standing in any future claims. 

Things often get difficult after relationship breakdowns. BoMaD, with full support of their child, will try and establish the money given was a loan that needed to be repaid to protect the family’s assets, rather than a gift. But, without any documentation to back up this claim, third parties (e.g. ex-partners) can walk away without repaying a penny, leaving both BoMaD and their children out of pocket.

Documentation is particularly important if BoMaD are loaning money later in life – perhaps as inheritance tax planning or from equity release loans. While it’s often not cheap to formally document the payments, future litigation costs could set you back hundreds of thousands and cost your life’s savings - as Mrs Farrell discovered. 

Conveyancers will carry out some due diligence to find where house purchase funds come from. However, this often doesn’t cover parents that sent money to their child’s account well before the buying process began. Discussions about written declarations of trust are often missed in these cases.

IFA’s should make their clients aware of the risks and insist upon BoMaD getting legal advice before gifting or lending money. They could even suggest that money should only be loaned after a pre or post nuptial agreement or co-habitation agreement is completed, to avoid ending up like Mrs Farrell.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.

 

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